Understanding your cost basis can save you pretty penny or three. Here’s a useful little primer on what cost basis is, and why it’s useful to understand, from the folks at Schwab.
Save on Taxes: Know Your Cost Basis
Many people dislike thinking about taxes so much that they ignore the topic until filing season is upon them. Unfortunately, waiting until the last minute to deal with tax matters can lead to missed opportunities to potentially reduce your tax bill.
Investors who include tax planning as part of their investing strategy could potentially see significant tax benefits over the long run, says Hayden Adams, CPA, director of tax and financial planning at the Schwab Center for Financial Research.
You shouldn’t just be thinking about capital gains and losses. Savvy investors know how to manage the so-called “cost basis” and holding periods of their investments to help reduce gains that are subject to taxes. Knowing your cost basis can be a valuable tool.
What is cost basis?
Simply put, your cost basis is what you paid for an investment, including brokerage fees, “loads” and any other trading cost—and it can be adjusted for corporate actions such as mergers, stock splits and dividend payments. This matters because your capital gain (or loss) will be the difference between the cost basis and the price at which you sell your securities. This cost is pretty easy to calculate—if you don’t reinvest dividends or dollar-cost average when you invest.
Read the full article here: